OTP Bank has announced the submission of a preliminary, non-binding offer for a 99.75% stake in HVB Splitska Banka. At the end of 2004, according to the last audited figures, the Croatian bank had total assets of EUR 2,799m, shareholders equity of EUR 183.5m, and a net profit of EUR 25.6m. The most recent figures of HVB Splitska Banka, provided by BA-CA, for 9M05 put total assets at EUR 3,011m, equity at EUR 240m, pre-tax income at 32.1m, pre-tax ROE at 18.8% and the cost/income ratio at 55%. The bank has 112 outlets and 453,000 customers.
Together with ownership of Nova Banka, the acquisition of Splitska Banka would boost OTP's market share to only some 13% (Splitska Banka has some 10% market share in loans and 7% in deposits in 2004). Whilst we believe that the acquisition of Splitska banka could be strategically positive for OTP, on the basis of statements from the central bank governor, the eligibility of the bank to act as an acquirer appears to be in doubt. In December 2005, Croatian central bank governor Rohatynski stated that Unicredito would not be able to sell Splitska to 'any of Croatia's five leading banks' (which would include OTP Bank) to avoid an unacceptable level of concentration in the sector.
Though we don't see this as likely to happen, given the position of the central bank governor, should OTP Bank be eligible to participate in the tender, the bank would have some advantage, with its top rivals eliminated. Nonetheless, it would still be up against competition from potential bidders, such as Societe Generale, Greek banks including National Bank of Greece, German banks, and PKO BP.
The press has speculated that the price for Splitska Banka could reach EUR 800m, equating to a historical P/B of 3.3x and a 2005F P/E of 23.2x (2005F net income = EUR 34.6m) Whilst the rumoured price may seem somewhat expensive, expectations in the region have grown lately, following Erste Bank's acquisition of BCR at a P/B of 5.8x, and the rise of stock market valuations throughout the region. Moreover, at least in the case of OTP Bank, some premium to stand-alone fair value could be justified by the potential for cost synergy via a combination with Nova Banka.
It appears that OTP Bank would likely raise capital, via a sale of treasury shares, to fund a successful purchase - the implied goodwill would reach some EUR 560m. On Hungarian regulations, the bank had a tier 1 ratio of 9.46% at the end of September, which provided it with some EUR 269m of excess capital (versus a 6% threshold). Of course, the bank has a strong capacity to generate new capital internally and most recently, it has been an active buyer on the market, adding to its treasury share position.
In our opinion, the news of OTP Bank's preliminary bid for HVB Splitska Bank is unlikely to have a significant trading impact. However, news that OTP Bank would be considered eligible from the central bank's standpoint could be received positively.